Which one is best for you?
If you are a new home buyer or already own a home, do you know the difference between a portfolio mortgage versus a secondary market mortgage? While there are differences, not many individuals know what sets them apart. Let’s take a look at both options, evaluate the pros and cons of each, then determine which one would be best for you.
Portfolio Mortgage Explained
A portfolio mortgage is a loan originated by a bank or other institution that produces loans. The loan is held in a bank’s portfolio for the life of the loan. A portfolio lender will charge fees to originate the loan and will earn money from a net interest rate spread between interest-earning assets and interest paid on deposits in a mortgage portfolio. There are more loan options available to borrowers through a portfolio lender; however, they may charge a higher interest rate. A lender assumes more risk on a portfolio loan by holding onto it.
Pros
- Prospective borrowers may qualify more easily for financing based upon their credit history.
- Portfolio loans are not subject to underwriting guidelines imposed by secondary market buyers, such as Fannie Mae or Freddie Mac – two government-sponsored entities.
- Portfolio lenders may offer more flexibility with originating their loans, i.e. Terms may be modified to meet a borrower’s financial circumstances.
- Allows for unique properties to be financed
- Loan servicing stays local for the term of the loan; therefore, should you ever have a question, all you need to do is call or visit your local bank.
- Offer the ability to request modifications to an existing loan
Cons
- A portfolio lender may impose a termination fee; however, federal law limits the amount a lender can charge. The fee can also increase the overall cost of the loan.
- A portfolio lender may charge higher interest rates to borrowers to offset the additional risk for maintaining the loan throughout its term.
Secondary Market Mortgage Explained
The secondary market is where home loans and servicing rights are bought and sold between lenders and investors. Secondary market mortgages are packaged into mortgage-back securities, then sold to investors. The investors will receive interest income from borrowers’ payments.
Secondary market mortgages provide an efficient system for underwriting due to the fact that the rules imposed upon this type of loan applies to every borrower.
Pros
- Offer fixed rates for up to 30 years.
- No prepayment penalties
- Can pay points to receive a lower interest rate
- Loans can be approved in as little as 7 days, depending upon the lender.
Cons
- Borrowers with low credit scores may face difficulty with obtaining financing as their credit will be perceived as a high risk.
- Higher closing costs for the loan (application fee, underwriting, home inspection, document preparation, site surveys, etc.)
- Servicing of a secondary market mortgage can be resold multiple times over its term
- A borrower may be required to escrow payments for both property taxes and home owner’s insurance in exchange for a lower interest rate.
As you can see there are advantages and disadvantages to a portfolio loan over a secondary market mortgage. Your financial situation will ultimately determine which type of mortgage is best for you. Oftentimes borrowers make decisions based solely upon rate; however, the lowest rate isn’t always the best factor in selecting a lender. As you consider lenders, give some thought to using a local bank. Banks have a long-standing history of supporting their customers and the community. And, you know they will be there to answer any questions you may have throughout the term of your loan.
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